This trader inquiry was in my email inbox this morning:
I would like to know where to put my stops to avoid being taken out.
This, of course, is a question a great many traders have. On the one hand the answer is easy. On the other, it’s not.
Here’s the easy answer. You should place your stop outside the price range which would be part of normal volatility. This is something a great many new traders don’t get. When you put a stop inside the normal volatility zone you are almost guaranteed to see it get hit. It’s a probability situation. For example, if you put your stop 5 points away from the current market price and the normal volatility for the time frame in question is 10 points, you can just about be sure you’ll be stopped out.
Of course the trick is figuring out what that volatility area is going to be. Some traders use things like Average True Range (ATR) to develop an idea of what current volatility is looking like. Others might use Bollinger Bands, or any indicator which provides and indication of price or range volatility.
Personally, my approach in placing stops is to put them at a price level which if hit means that in all likelihood the market action I was anticipating isn’t going to play out. That, of course, comes from the methodology you use for your trading.